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18 August 2026
Should my father put money for his grandchildren in a Junior ISA or pension?5 min readAuthor
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Ask the experts. Paul Angell is on hand to answer your questions about investments. If you'd like a question considered for a future edition, send it in now.
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I’m looking to choose some bond funds as I’m heading into retirement. Can I go about it the same way as picking equity funds? I’m not exactly sure what to look for in terms of investing style.
Harry
Paul Angell, AJ Bell Head of Investment Research, says:
Choosing bond funds can feel more intimidating than equities on the surface, because the bond market is vast and nuanced. While the main traits you’ll need to look for in a fund manager are the same, it’s important to understand the different options available for bond funds and the functions they can serve. We’ll start there.
Just like equities, bond funds range across different sectors, regions, and management styles. Understanding what each option means is the first step to choosing a fund that’s right for you.
What are you looking for?
For example, some bond investors might be looking for holdings that are steady performers. They will likely be drawn towards developed market government bonds and investment grade corporate bonds because these two areas have a lower chance of the debt not being repaid when the bonds come to maturity.
Other investors may be on the hunt for larger returns and be willing to take more risk through sectors like high yield bonds. High yield refers to debt from issuers who are considered higher risk in terms of their ability to repay their loans and therefore must offer a better coupon (level of income) for investors to want to buy the bonds.
Both types of funds come with different levels, and types of risk. Government bond funds primarily take duration risk. This means they are exposed to changes in expectations for inflation and interest rates. As these expectations fall government bonds do well and as these rise they suffer.
Corporate bond funds additionally take on credit risk. They are focused on the quality of the company issuing the debt, and how likely they are to pay it back versus the amount the company is willing to pay as a coupon.
Some managers will hold both government and corporate bonds within a single fund, which are categorised as strategic bond funds. Be careful with this label, because there’s a lot of variety that can sit under it.
Some bond funds with this ‘strategic bond’ label will just hold different types of corporate bonds, like investment grade and high yield. Others would be more truly ‘strategic’ and actively manage allocations to both types of risk through government and corporate bonds. A fund’s factsheet will typically provide both the fund’s duration, and its level of exposure to corporate bonds.
One example of a fund holding corporate and government bonds on AJ Bell’s Favourite funds list is the Artemis Strategic Bond fund.
Active versus passive
While many active equity funds have failed to outperform their passive counterparts in the past decade, the picture is more mixed for bond funds. Our research has shown that the average active bond fund has edged out the passive alternatives in the past, net of fees, and there are a few reasons why.
One element is trading costs: bond indices often have thousands of holdings, which makes trading expensive for bond tracker funds, particularly when there are changes to the index. To limit this issue, passive funds will typically hold what they call a representative sample of bonds, which means the fund will hold a group of bonds that has the same sort of composition as the index rather than the exact same bonds.
There is also arguably more structural opportunity for market inefficiency in bond markets. Bond indices are constructed so companies that issue the most amount of debt make up the largest part of the index. This is very different to equity markets, where the companies that are deemed the most valuable make up the largest part of the index.
Choosing a bond fund
With that background, here’s a few steps to take when choosing a bond fund.
1. Determine your goal
What is the reason you are purchasing this bond fund? Are you looking to derisk your portfolio, create more diversification, start taking income, or something else?
2. Match your bond fund to your goal
Different types of bonds will fit each of these goals. If you are looking for income, for example, you might be okay with taking slightly more credit risk through high yield bonds. If you are looking to derisk part of your portfolio, you may look towards government bonds or investment grade corporate bonds for additional stability.
3. Think about your ‘Five Ps’
In a previous column, we spoke about the Five P’s when choosing a fund: philosophy, performance, people, price, and process. These same principles apply for bond funds but remember that past performance doesn’t guarantee the same for the future.
4. Does the fund do what it says on the tin?
This is the extra check that’s important to do with bond funds. People typically invest in them to diversify their risk from pure equity exposure. But some bond funds move more in line with the equity market than you may expect.
If you are looking at corporate bond funds, make sure they have an appropriate amount of duration risk (i.e. similar to their index), and if you’re looking at government bond funds, ensure they aren’t taking credit risk. If you’ve chosen a strategic bond fund, make sure you understand if it is truly spanning government and corporate bonds, or just corporate. Either is fine, but they will act differently in your portfolio.
5. Go shopping
Have a look around at different bond funds before making your decision. If you aren’t sure where to start, you can look at our Favourite funds list, which features corporate, government and strategic bond funds.
If you aren’t sure how to diversify your portfolio with bond funds or want to start earning income from your investments but are nervous about how to split your assets, you can also use a multi-asset fund to get a blend of both bonds and equities. The AJ Bell fund range offers growth as well as income funds that mix bonds and equities depending on your risk profile, within a single fund.
Paul Angell: Head of Investment Research
Paul Angell is AJ Bell's Head of Investment Research. Paul began his investment career with a global investment bank in 2010, holding various roles across London and Hong Kong over the following years. In 2016...
